Speaker 1:        Welcome to you, our listener joining us today. You are listening to the Guerdon Associates podcast.

Speaker 2:        Right, thanks for having me.

Speaker 1:        This broadcast is based on the October 2026 issue of Guerdon News, which is the monthly newsletter articles published by Guerdon Associates. This broadcast covers global shifts in executive pay governance and the integration of artificial intelligence in stewardship. We review proposed regulatory updates in the United Kingdom and Australia regarding corporate reporting and remuneration principles. Finally, we examine share-based compensation practises across companies listed in the ASX 300.

Speaker 2:        So according to the research published by Guerdon Associates in their October 2026 governance report, international executive pay governance is transitioning across multiple markets.

Speaker 1:        Okay. Transitioning in what way?

Speaker 2:        Well, expectations for disclosure are moving from prescriptive reporting toward investor-friendly reporting.

Speaker 1:        Right. The United States is currently considering ways to reduce reporting burdens on companies, and the United Kingdom’s moving away from formulaic reporting structures.

Speaker 2:        Exactly. Historically, pay practises align due to benchmarking pressure where companies replicated the compensation structures of their peers.

Speaker 1:        But those practises are transitioning to customisation in Australia, the United Kingdom, and the United States as engagement with institutional investors evolves into a tailored process.

Speaker 2:        Yeah, and risk management and clawback provisions are included across most international markets. In Australia, these measures are adopted voluntarily by companies.

Speaker 1:        And because they are voluntary, enforcement relies entirely on board discretion rather than regulatory mandate.

Speaker 2:        Yes. Also, environmental, social, and governance influence and executive compensation surged between 2020 and 2023.

Speaker 1:        Right. But since 2024 and 2025, this trajectory reversed or softened across Australia, Brazil, and the United States.

Speaker 2:        That is correct. So, proxy advisor influence on votes is facing structural challenges. Shareholders are relying on direct engagement with issuers rather than outsourced voting recommendations.

Speaker 1:        Meaning near-term developments show proxy advisor influence will become less standardised.

Speaker 2:        Yes. Institutional investors develop their own internal analytics and client-specific voting frameworks. Plus, pass-through voting is expanding, which transfers the voting power from the fund manager directly to the underlying investor.

Speaker 1:        So investors will focus on realised and realisable pay.

Speaker 2:        Right, which focuses on what executives actually earn in cash or vested equity or can realistically earn. This is utilised rather than the initial grant date value estimated at the time of the award.

Speaker 1:        Because realisable pay assists shareholders with evaluating the alignment of the realised pay against the actual performance recorded by the company during the financial year.

Speaker 2:        Exactly.

Speaker 1:        Artificial intelligence enabled stewardship is another near-term development. Stewardship teams use artificial intelligence to identify compensation outliers, governance concerns, director independence issues, and related party risks early in the proxy season.

Speaker 2:        And identifying these elements prior to the annual general meeting increases the necessity of preemptive shareholder engagement. Boards must articulate their frameworks before the artificial intelligence flags structural deviations to the stewardship teams.

Speaker 1:        Yes. Well, how does this shift away from standardised proxy advisor checklists operate alongside the rise of internal investor analytics and AI enabled stewardship?

Speaker 2:        So standardised checklists provide a uniform evaluation mechanism for proxy advisors. Internal investor analytics replace this uniform mechanism with bespoke parameters set by individual stewardship teams. I see. Artificial intelligence processes the corporate disclosures against these bespoke parameters. The evaluation operates through customised digital extraction rather than a universal checklist.

Speaker 1:        Right. So, boards are required to provide explanations for how pay design fits the company’s strategy and risk profile to satisfy these customised evaluations.

Speaker 2:        Precisely.

Speaker 1:        To provide a brief summary, we see varying regional adoptions of pay governance and a transition toward AI-supported realised pay analysis. The key takeaway for the board director is to prepare for bespoke institutional engagement and AI-enabled analytics replacing standardised proxy voting models.

Speaker 2:        Shifting gears to how these AI tools extract information from reports. Okay. Guerdon Associates articles published in October 2026 detail that pre-AI disclosures favoured visual engagement and bespoke terminology to differentiate a company’s approach.

Speaker 1:        Which created obstacles for machine readability.

Speaker 2:        Exactly. Artificial intelligence answers queries based on two structural factors.

Speaker 1:        The first factor is information extraction, which is driven by clean document architecture, right?

Speaker 2:        Yes. And the second factor is comprehension, which is driven by standardised unambiguous language.

Speaker 1:        So, if extraction relies on an incomplete information foundation, artificial intelligence is highly likely to generate flawed conclusions.

Speaker 2:        Yeah. And if the messaging lacks clarity, artificial intelligence applies statistical assumptions to understand the reporting and potentially replaces actual information with typical placeholders generated by the model.

Speaker 1:        Optimising a remuneration report for readability requires structural adjustments. Headings must be literal and nested correctly within the document hierarchy.

Speaker 2:        Right. Headings should be descriptive of the content and consistent with the underlying report styling protocols. Also, merged or split cells in tables must be avoided.

Speaker 1:        Why is that?

Speaker 2:        Well, artificial intelligence models process tables by assigning a coordinate to each cell within a grid structure. When a human merges a cell, it removes the dividing line between two coordinates.

Speaker 1:        Oh, so the artificial intelligence model encounters a coordinate with overlapping information points?

Speaker 2:        Yes, which causes the extraction protocol to fail.

Speaker 1:        Another item on the checklist, do not rely on footnotes to convey meaning to body text.

Speaker 2:        Right, because artificial intelligence fails to link superscript markers such as a one or an asterisk to the corresponding text at the bottom of the page.

Speaker 1:        The model identifies the superscript symbol, but lacks the spatial navigation protocol required to scan to the footer, read the corresponding text, and integrate that meaning back into the original sentence.

Speaker 2:        Exactly. The checklist also specifies avoiding or mitigating the impact of charts because extracting information from visual charts presents difficulties for artificial intelligence.

Speaker 1:        So supplementary disclosure in text format may be needed. Repetition of key messages in multiple locations assists models to be confident in the veracity of the extracted information.

Speaker 2:        Yes, and standardised terminology is required.

Speaker 1:        Bespoke terms must be replaced with standardised acronyms. Those acronyms being KMP, STI, LTI, NPAT, TSR and FAR.

Speaker 2:        Right. Remuneration reports that have been rolled over year after year retaining custom language may no longer be appropriate for machine parsing.

Speaker 1:        I have to point out the mechanical tension between maintaining human visual engagement and modifying tables or eliminating footnotes purely for the benefit of machine grids. Does this require structural compromise?

Speaker 2:        Well, decisions prioritise either the human or the artificial intelligence reader. Implementing strict grid structures removes the formatting variability that human readers use to navigate visual information.

Speaker 1:        Right. And eliminating footnotes requires integrating explanatory text directly into the main paragraphs, which disrupts the visual flow for a human reader.

Speaker 2:        Yes. Modifying tables to prevent merged cells and forces uniform rows and columns regardless of the visual presentation. These actions prioritise machine extraction protocols over traditional visual layouts.

Speaker 1:        Okay. To offer a brief summary, structural and terminological adjustments are required to make corporate disclosures readable by artificial intelligence. The key takeaway for the board director is to coordinate with typesetting teams to implement strict grid structures and literal headings that prevent AI models from generating flawed conclusions.

Speaker 2:        Moving on to our next story regarding international reporting overhauls. According to the research published by Guerdon Associates and their review of the UK consultation, the UK government published an open consultation on September 7th, 2026.

Speaker 1:        And the consultation closes on November 30th, 2026.

Speaker 2:        Yes. The consultation targets reform of the corporate reporting system. The proposal lists several removals. First is the annual advisory vote on the remuneration report while retaining the triennial binding policy vote on executive remuneration policy.

Speaker 1:        The policy vote concerns the design of executive pay frameworks while the annual vote covers pay outcomes for that financial year.

Speaker 2:        Exactly.

Speaker 1:        Right.

Speaker 2:        The rationale is to save time and resources at annual general meetings by reducing repeated voting on pay practises already approved through the forward-looking triennial policy vote. Got it. A second removal targets the CEO employee pay ratio. United Kingdom companies with over 250 employees must annually disclose the ratio of their CEO’s pay to the lower quartile, median and upper quartile of their UK employees.

Speaker 1:        And this disclosure historically goes back nine reporting periods.

Speaker 1:        A third removal is the illustration of long-term incentive plan outcomes in the event of 50% share price appreciation.

Speaker 2:        Correct. The consultation proposes removing reporting requirements already covered by related provisions in the UK corporate governance code, which applies a ‘comply or explain’ framework.

Speaker 1:        The code covers the work of the remuneration committee, shareholder and employee engagement, shareholder dissent, malus and clawback policies, and alignment of director pay with employees.

Speaker 2:        And disclosure of these areas is removed because they remain within the code. Additional removals include the relative importance of spend on pay and executive director’s pay prior to a company becoming listed on the exchange.

Speaker 1:        But the consultation proposes retaining specific requirements that align reporting with ASX standards. These retained requirements include the annual single figure table and the remuneration committee chair statement summarising key decisions, including the use of discretion.

Speaker 2:        Yes. Further retained requirements are the details of backwards looking performance measures for the financial year, the 10-year performance graph showing TSR and CEO pay, and the forward-looking director’s remuneration policy approved tri-annually.

Speaker 1:        While retaining the total single figure of remuneration, the government proposes to refine the existing methodology for calculating it and welcomes views on establishing clarity on what is included in the calculation.

Speaker 2:        And the government welcomes views on whether executive director shareholdings need to be included in the remuneration report as they are available through London Stock Exchange regulatory news announcements.

Speaker 1:        How does removing the CEO employee pay ratio and the annual advisory vote alter the mechanical evaluation process for shareholders at annual general meetings?

Speaker 2:        Well, the mechanical evaluation process transitions from an annual cyclical review to a tri-annual framework. Shareholders evaluate and approve the fundamental design of the pay frameworks every three years.

Speaker 1:        Right. So, removing the annual advisory vote removes the mechanism to vote on the specific yearly outcomes.

Speaker 2:        Exactly. Removing the CEO employee pay ratio removes the requirement to calculate and compare quartile pay metrics across nine reporting periods.

Speaker 1:        Providing a brief summary, the UK proposes to eliminate duplicated or burdensome remuneration disclosures while keeping single figure tables and backwards looking metrics. The key takeaway for the board director is to monitor the progress of the UK simplifications as changes in UK reporting frequently preview corresponding adjustments in Australian governance expectations.

Speaker 2:        Turning our attention to the Australian regulatory landscape. Okay. Guerdon Associates articles published in their October 2026 submission cover the ASX fifth edition consultation draft released on July 21st, 2026.

Speaker 1:        The ASX is aiming for the financial year ending June 30th, 2028 to be the first period for this edition.

Speaker 2:        Yes. The draft proposes changes to principle eight regarding remuneration. Recommendation 8.1 changed wording from ‘appropriate’ and ‘not excessive’ to ‘fair’ and ‘reasonable’.

Speaker 1:        But an alternative wording is proposed for this section. The proposed alternative is ‘sufficient to attract, retain, and for executives, motivate’.

Speaker 2:        Right. Then recommendation 8.2 introduces explicit board discretion to adjust performance-based remuneration outcomes of its senior executives downwards when appropriate.

Speaker 1:        And the alternative wording proposed for 8.2 is ‘remuneration vary with performance’. This prescribes the pay varies with performance, eliminating the need to prescribe downward adjustments explicitly or specify their direction.

Speaker 2:        Yes. And recommendation 8.3 requires NEDs to be remunerated strictly with fixed fees, which include cash, service-based equity and superannuation along with disclosure of policies in relation to share ownership.

Speaker 1:        The proposed replacement is recommendation 8.4. This suggests incorporating methods for both directors and executives to receive and own equity through their remuneration.

Speaker 2:        Right. This encompasses both executives and directors. Also, the submission notes that principle eight omits addressing conflicts of interest.

Speaker 1:        So, the suggestion is to re-head principle eight and amend its description to align remuneration to company interests.

Speaker 2:        Correct.

Speaker 1:        I have a question on this part. How does replacing appropriate with fair specifically affect a company’s ability to objectively assess compliance for their ‘if not, why not’ disclosure obligation?

Speaker 2:        Well, objective assessment requires a measurable standard. The Australian Securities Exchange operates on a comply or explain model. If a company deviates from a recommendation, it must publish a rationale explaining why its alternative practise meets the underlying principle.

Speaker 1:        Okay. And ‘appropriate and not excessive’ functions as a standard that is tested against external peer benchmarks and structural requirements?

Speaker 2:        Yes, but ‘fair’ lacks a specified recipient within the wording. Assessing compliance for the ‘if not, why not’ obligation requires evaluating whether the standard is met.

Speaker 1:        So without specifying who the remuneration is fair to, whether it’s the executive, the shareholder or the employee, the assessment mechanism lacks the parameters required to evaluate compliance and draft the required rationale.

Speaker 2:        Exactly.

Speaker 1:        As a brief summary, we reviewed the proposed ASX Fifth Edition changes to principle eight and the alternative wording suggested for clarity and alignment. The key takeaway for the board director is to evaluate current pay frameworks against the draft’s prescriptive downward adjustment mechanisms and the fixed fee requirements for NEDS.

Speaker 2:        Advancing to our final story on structural compensation practises.

Speaker 1:        Let’s get into it.

Speaker 2:        According to the research published by Guerdon Associates in their analysis of share-based compensation, the research was conducted across the ASX 300.

Speaker 1:        And the median proportion of total employee expense in share-based compensation is 3.3% across the ASX 300.

Speaker 2:        Right. Share-based compensation aligns outcomes for employees with the interests of shareholders.

Speaker 1:        The sectors with the highest proportion of total pay delivered in equity are materials, information technology, and real estate.

Speaker 2:        Yes. And profitability influences these proportions. Companies with negative pre-tax profit paid 19% of total employee expenses in equity at the median.

Speaker 1:        While companies with positive pre-tax profit paid 3% at the median.

Speaker 2:        Correct. Looking at the averages, loss-making companies recorded 25.4%. Profitable companies recorded 7.0%.

Speaker 1:        The 25th percentile is 6.4% for loss-making and 0.9% for profitable. The 50th percentile is 18.8% for loss-making and 2.7% for profitable.

Speaker 2:        And the 75th percentile for loss-making companies is 38.8% compared to 7.5% for profitable companies.

Speaker 1:        Share-based compensation expense per employee is calculated by dividing total expenses by the number of employees.

Speaker 2:        Right. And this figure is highest in the energy, materials and information technology sectors.

Speaker 1:        While companies in the industrials, consumer staples, and consumer discretionary sectors have the lowest share-based compensation expense per employee.

Speaker 2:        Yes. This is driven by higher employee counts and expected lower proportion of employees granted equity. The research indicates that equity may be used by ASX listed companies to attract and retain talent while helping preserve cash.

Speaker 1:        Because equity grants that vest monthly or quarterly based on continued service known as restricted share units may be valuable to employees when compared to performance contingent LTI grants with uncertain vesting outcomes.

Speaker 2:        Exactly. Equity plan dilution limited to 5% of issued share capital is supported by proxy advisors.

Speaker 1:        And many ASX 300 companies remain below this limit for their current equity plans.

Speaker 2:        Pointing out the specific numerical disparity between loss-making and profitable entities, which is a 19% versus 3% median, how does the structural trade-off operate between cash preservation and shareholder dilution?

Speaker 1:        Well, the structural trade-off functions through the issuance of shares in lieu of cash. Loss-making companies retain cash reserves for their operations by substituting a portion of employee cash compensation with equity grants, and executing the substitution requires creating new equity. The creation of new equity increases the total issued share capital of the company.

Speaker 2:        So existing shareholders retain the identical number of shares they previously held?

Speaker 1:        Yes, but as the total issued share capital increases, the percentage of ownership held by the existing shareholders decreases.

Speaker 2:        I see.

Speaker 1:        The trade-off dictates that preserving cash directly corresponds to a defined percentage decrease in existing shareholder ownership, provided total dilution remains under the 5% threshold.

Speaker 2:        For a brief summary, we covered a breakdown of share-based compensation distribution across sectors and profitability statuses on the ASX 300.

Speaker 1:        And the key takeaway for the board director is to assess the feasibility of utilising broader equity grants to retain talent while preserving cash, provided total dilution remains under the 5% threshold.

Speaker 2:        Exactly.

Speaker 1:        As we conclude today’s session, I want you to consider a final thought. Given the simultaneous rise of AI ingestion tools and the reduction of narrative reporting requirements, will this eventually lead to a regulatory environment where companies submit standardised, machine-readable inputs rather than traditional corporate reports?